We at River Heights Consulting are dedicated to taking the friction out of the Distributor Channel. Here you will find stories, features and commentary on the world of Wholesale Distribution, Distributor Management, and Strategic Planning.

Wednesday, July 29, 2015

Pricing Process appears to be a Top Secret Strategy

A couple of weeks ago I published an article called Pricing Professional – The time has come. The piece outlined the need for distributors to consider how they run their business and develop a new position. We hit on why the person who typically handled ‘pricing tasks’ was likely more of an administrator responsible for loading the prices of income purchases rather than a margin building professional. We pushed for distributors to consider the impact of a true pricing process and the qualities of the person best equipped to make the pricing process work.

Somewhere along the way, we touched a nerve. Building a pricing process is a viewed as a top secret strategy. While a number of our readers commented, it seems no one wants to go on record with their plans. Here is a sample of the way the emails began:

“Hope things are going well. While you'd probably prefer I comment directly on the post I really don't want our competitors to know we're doing this. So feel free to use the info here without disclosing the source or location.”

But not everybody was concerned about their competition. A couple were concerned about the reaction of their suppliers. One made this point:

“Many of our suppliers don’t understand all of the work that goes into selling and making their products work. Every time they bring us into an opportunity, they recommend prices that are way outside of the range we feel needed to make a decent profit. If we go outside of their suggested 15-16 percent range, they push back with stories of our need to grow their sales more aggressively.”

One was concerned with push back from their selling team:

“Management has given us the responsibility of raising margins, but they will quickly cave when a salesman comes back with a story of this or that competitor having a lower across the board price. We fear that acknowledging our efforts in the pricing department will only create an environment where sales brings in a story for every account they deal with. This will crush our efforts to make pricing stick.”

One distributor executive shared this story from a previous life:

“My previous employer had an entire team developed to establish pricing levels. It was a company-wide effort that crossed over all of the branches so it was impossible for the team to really track the efforts. I, like all the other branch managers, gave the program lip-service. We acted like were engaged, but basically our job was to grow the gross margin as a total rather than improve the margin. Without detailed measures, we could go fight the other battles and continue with the old version of letting sales set the price.”

But all made the point to say, their current version of price process worked. The reports went something like this:

“We went live with Strategic Pricing Associates just a little over a year ago. Based on offline conversations with others already using SPA, we decided to apply our pricing process to all of our customers except our top 100 accounts. In our old culture, it was acceptable for both outside and inside salespeople to set their own price. It took us a while to get this changed. Originally we had a team of three people who spent nearly an hour at the end of each day reviewing the pricing exceptions made by our salespeople. We constantly reeducated and argued. After a month or so, everyone knew the new program had teeth. We still find ourselves discussing price issues but not nearly as often. And, our GM is up dramatically, over 2 points…”

“Our management team attended a two day workshop at Texas A&M last year on this subject. We came back and did the customer stratification and changed some pricing matrices but just from giving the customers a label and allowing salespeople to react to that we have raised our GM by over 60 basis points in less than 6 months. I guess what I'm saying is this really works and we fully expect to get 100 basis points this year and at least 50 next year. In addition if we reach our goal this year everyone in the company will benefit financially. The pressure the inside people exert on the outside people for margins is great to see.”

Over the past couple of years I have talked directly to over 50 of Strategic Pricing Associates’ 350+ clients. A good many of these have been “on the record” conversations, even more were enthusiastic about the results but not ready to speak to the world in general. Nearly all have seen marked improvement in their Gross Margin levels; ranging from just south of two points all the way to four with one pushing five full points of GM improvement. One of the critical differences seems to be the level of engagement of the distributor’s top management. The second comes in their selection of a pricing professional. Companies who select a pricing leader with strength of conviction, leadership skills and organizational clout gain and hold onto more gross margin gains than their counterparts (who still perform quite well just not as well.)When asked if the whole process is worth it, one president of a 40 Million dollar distributor made this comment,

“Our gross margin is up 2.4 points. Do the math. There is nothing we could have done to add a million bucks to our bottom line faster than assigning one of our top guys to the post of Pricing Czar.”

Top Secret Strategy?With results like these, I can see why pricing strategy might be considered the secret sauce of distribution profitability. Those employing advanced pricing strategies are quietly building their cash reserves for future purchases, systems improvements, building upgrades and establishing shareholder equity. If they are your competitor, there is a very good chance you’ll never learn of their strategy from shared customers. Why? After speaking with all of these folks, only one reported an issue with customer push back. And, that one was a customer put into the wrong category via clerical error. How can normally price sensitive customers miss a margin move of this magnitude? The answer falls with price sensitivity. A small subset of the products sold by the typical distributor carry a great deal of price sensitivity; market conditions set the price. The rest are purchased based on availability, ease of doing business, customer convenience and bundled services. Most distributor salespeople price everything at the same low margin levels as the few products with price sensitivity. By doing such, they are giving away huge opportunities to increase profitability. Returning to the pricing professional, allow me to ask one question: Who is responsible for driving gross margin improvement at your company? If this is such a top secret that even those within your organization don’t know who it is… It’s time for a change.